It’s that time of year again. No, not Valentine’s Day…and I’m not even talking about President’s Day. I’m talking about Taxes! Your personal income tax return isn’t due until April 15th, and if you’re like many people, you might file for an extension so that you have until October 15th to submit it. However, it’s usually right around this time of year that taxes are on the mind, and I start getting questions about how to save on taxes. Unfortunately, there are very few things that can be done now to affect your 2018 income tax return, but today I thought I’d share an idea on one thing that you can do even after the close of 2018 that might help lower your tax bill and, as a bonus, get you to save more for retirement.

Traditional IRA

Contributions:
If you haven’t done so yet, you may
contribute up to $5,500 out of your 2018 earned income to a traditional IRA;
$6,500 if you’re age 50 or older. You have until your filing deadline (April 15th,
2019) to make this contribution for your 2018 income tax return. However, if you
or your spouse is covered by a retirement plan at work (such as a 401k, 403b, SEP,
SIMPLE, or Profit Sharing Plan), then you might not be able to take a deduction
for all or part of the contribution to your IRA depending on your income.

You
are not allowed to contribute to a traditional IRA for the year in which you will
or have attained age 70½. In other words, if your birthday is on June 30th
or before, then you may not contribute to a traditional IRA in the year that
you turn 70. If your birthday is on July 1st or later, then you may still
make a contribution for that year. You will also have to start withdrawing Required
Minimum Distributions from your traditional IRA in the year that you turn 70½.

Income
Limits for Non-Deductibility: In the
situation where you or your spouse is covered by a retirement plan at work, for
married couples filing jointly, if your modified adjusted gross income (AGI) is
less than $101,000, you can still deduct the full amount of your IRA
contribution. If your modified AGI is greater than $121,000, you may not deduct
any of it. In between those two figures, you may take a partial deduction that
phases out as you reach $121,000 in AGI.

For
single filers, those figures are $63,000 and $73,000 respectively. If you’re
married and filing separately, you can’t take a deduction at all if you have
more than $10,000 AGI, and you only get a partial deduction if your AGI is less
than $10,000.

Roth IRA

If you can’t take a deduction now, or if you prefer that your earnings not only grow tax-free, but also come out tax-free, then you may be able to contribute to a Roth IRA instead of a traditional IRA.

Contributions:
You may contribute the same amount to a Roth
IRA out of your 2018 earned income as you could to a traditional IRA (up to a
maximum of $5,500, or $6,500 for those aged 50+). Alternatively, you can
contribute a combination of some amount to each IRA as long as the total contributions
between the two doesn’t exceed the maximum annual contribution limit.

Income
Limits: Although you do not get to take
a deduction up-front for the contribution to a Roth IRA, the total amount including
growth can all be distributed to you tax-free during retirement. If your AGI is
above the limit allowed to take a deduction for a traditional IRA contribution,
you may consider contributing to a Roth IRA instead, as long as your AGI is
within the limits allowed for Roth Contributions.

For
married couples filing jointly, you may contribute up to the maximum amount if
your AGI is less than $189,000. Between $189,000 and $199,000 of AGI you may
make a partial contribution that phases out to zero at $199,000 of AGI.

For
single filers the figures are $120,000 to $135,000. Those who are married
filing separately may only make a partial contribution that phases out to zero
at $10,000 AGI.

Expert’s Tip: Even if you have too much income to qualify to contribute to a Roth IRA, you can still make a non-deductible contribution to a traditional IRA. Then, you can convert the assets newly contributed to the traditional IRA into a Roth IRA, and there are no income restrictions on a conversion! With a conversion, you normally have to claim in your income the amounts being converted from the traditional IRA into the Roth IRA. However, if you did not get to take a deduction for the contribution to the traditional IRA in the first place, then you don’t have to pay income tax on the contributed principal, when subsequently converting to a Roth IRA. This is a backdoor that essentially lets you make a Roth IRA contribution every year even if you exceed the income limits for Roth contributions!

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